Friday, January 16, 2009

I know that very few retail traders actively trade VIX options, but for those who usually do not consider this product, I want to highlight the fact that because the VIX expiration calendar is different from the standard third Friday of the month equity and index expiration calendar, this weekend might be an appropriate time to think about VIX options as a short-term portfolio protection play.

Anyone who has portfolio insurance in the form of options expiring tomorrow is likely concerned about what will happen over the long weekend, particularly with rumors about the possibility of Citigroup (C) and Bank of America (BAC) being nationalized. One solution, of course, is to roll those January options into February and beyond. If, however, you do not necessarily want to buy portfolio protection for a full month, then you can get it through Wednesday morning with the January VIX options. The last trading date for January VIX options is Tuesday, January 20th, with the options settled at the open on Wednesday morning.

Equity futures have been trending up over night, but substantial short-term risks remain, with all the uncertainty over the financials, compounded by a three day weekend, followed by the inauguration of Barack Obama coming up on Tuesday. I am not going so far as to recommend the purchase of VIX calls, but I do want to make sure that investors with a short-term horizon are aware of the VIX options expiration calendar anomaly.

I have become a recent reader of your blog and was interested in the VIX/VXV ratio you have discussed. I am a Bloomberg user and have been having a hard time finding the ticker for the VXV. Maybe we don't have the feed for it but is that the Blomberg ticker?

These volatility indices measure volatility over a 30 day time horizon.

Think about the timing for the options in the underlying (i.e. SPX.) These options are exactly 30 days from expiration once each month. SPX options expire on February 20th...therefore VIX January options are set to expire exactly 30 days prior to that, four weeks and two days earlier. This means that VIX options will always expire on Wednesdays (except for some very unusual holiday situations), 30 days prior to the options for the next month in the underlying.

Jason,

I don't have a Bloomberg terminal, but perhaps someone else out there can help.

Purpose of this Blog

The intent of this blog is to educate, inform and entertain readers, while also serving as an archived learning laboratory of sorts as I try to sharpen my thinking in areas such as volatility, market sentiment, and technical analysis. I also enjoy charging off on tangents and hope that readers may find some illumination or at least amusement in these forays.

Reviews of VIX and More

About Me

Chief Investment Officer at Luby Asset Management LLC in Tiburon, California. Previously worked as a full-time trader/investor and also a business strategy consultant. Education includes a BA from Stanford and an MBA from Carnegie Mellon.
Useless trivia: I once broke the world pogo stick jumping record without knowing it.